Deere & Company

and only until the question and answer session of today's conference. I would now like to turn the call over to Mr. Josh Beal, Director of Investor Relations. Thank you. You may begin.

Hello. Good morning. Also on the call today are Josh Jepson, Chief Financial Officer, Josh Beal, Director of Investor Relations, and Josh Rolliter, Manager of Investor Communications. Today, we'll take a closer look at Deere's fourth quarter earnings, then spend some time talking about our markets and our current outlook for fiscal year 2024. After that, we'll respond to your questions. Please note that slides are available to complement the call this morning. They can be accessed on our website at johndeere.com backslash earnings. First, a reminder, this call is being broadcast live on the internet and recorded for future transmission and use by Deere and Company. Any other use, recording, or transmission of any portion of this copyrighted broadcast without the express written consent of Deere is strictly prohibited. Participants in the call, including the Q&A session, agree that their likeness and remarks in all media may be stored and used as part of the earnings call. This call includes forward-looking statements concerning the company's plans and projections for the future that are subject to uncertainties, risks, changes, and situations in circumstances and other factors that are difficult to predict. Additional information concerning factors that could cause actual results to differ materially is contained in the company's most recent Form 8-K, Risk Factors in the Annual Form 10-K, as updated by reports filed with the Securities and Exchange Commission. This call also may include financial measures that are not in conformance with accounting principles generally accepted in the United States of America, GAAP, Additional information concerning these measures, including reconciliations to comparable gap measures, is included in the release and posted on our website at johndeere.com backslash earnings under quarterly earnings and events. I will now turn the call over to Josh Rolliter.

Good morning, and an early happy holidays to everyone. John Deere finished the year with an excellent fourth quarter, thanks in part to strong margins of 20.3% for equipment operations. Continued outperformance throughout the year, resulted in 16% top line net sales and revenue growth for 2023. Operating margins came in for the year just shy of 22%, helping generate nearly 12 billion in operating cash flow. Across our businesses, performance was driven by strong market demand, operational execution, and improved production costs. Looking ahead to 2024, shifting ag market dynamics will lead to a decline in demand. However, we expect to hold the structural gains in profitability achieved over the last few years, delivering expected decrementals off our 2023 baseline financial performance. Meanwhile, the construction and forestry market demand outlook remains mixed, with uncertainty in housing and commercial investments partially offset by tailwinds from megaprojects and infrastructure spending. Slide three opens with the results for fiscal year 2023. Net sales and revenues were up 16% to $61.3 billion, while net sales for equipment operations were also up 16% to $55.6 billion. Net income attributable to Deere and Company was $10.2 billion, or $34.63 per diluted share. Next, fourth quarter results are on slide four. Net sales and revenues were down 1% to $15.4 billion, while net sales for the equipment operations were down 4%. to $13.8 billion. However, net income attributable to Deere and Company increased to $2.4 billion, or $8.26 per diluted share. Moving to slide five, we'll review our fourth quarter segment results, starting with our production and precision ag business. Net sales of $6.965 billion were down 6% compared to the fourth quarter last year. This was primarily due to lower shipment volumes partially offset by price realization. Price realization in the quarter was positive by about 10 points. Currency translation was also positive by about one point. Operating profit was $1.836 billion, resulting in a 26.4% operating margin for the segment. The year-over-year increase in operating profit was primarily due to price realization partially offset by lower shipment volumes and sales mix, as well as higher SANG and R&D spend, notably Production costs came in favorable for the quarter. Recall that tough fourth quarter year over year comps for PPA were expected due to supply chain issues in 2022, which drove late shipments and out of season deliveries into the fourth quarter. Turning to small ag and turf on slide six, net sales were down 13%, totaling 3.094 billion in the fourth quarter due to lower shipment volumes partially offset by price realization. Price realization in the quarter was positive by nearly five points. Currency was also positive by approximately one point. For the quarter, operating profit declined year over year to $444 million, resulting in a 14.3% operating margin. The decrease was primarily due to lower shipment volumes and mix, along with higher SANG and R&D expenses, partially offset by price realization and production costs. Please flip to slide seven for the fiscal year 2024 ag and turf industry outlook. We expect large ag equipment industry sales in the U.S. and Canada to decline 10 to 15 percent, reflecting softening sales on the heels of three years of strong demand, coupled with moderating farm fundamentals and high interest rates weighing on discretionary equipment purchases. Headwinds will be tempered by healthy farm balance sheets, declining input costs, supportive fleet fundamentals, and continued profitability following record years. For small ag and turf in the U.S. and Canada, industry demand is estimated to be down 5 to 10 percent. The dairy and livestock segment continues to remain steady thanks to elevated protein and hay prices. This is offset by subdued demand in the turf and compact utility tractor markets, which are closely tied to single-family home sales and home improvement spending, both of which remain under pressure from higher interest rates. Shifting to Europe, the industry is forecasted to be down around 10%. Farm fundamentals in the region continue to be mixed with opposing dynamics between Eastern and Western Europe. Eastern Europe continues to be impacted by grain inflows from Ukraine driving down commodity prices, while Western Europe remains profitable with favorable grain prices and declining input costs, stabilizing equipment demand in 2024. Dairy and livestock risks have also abated in recent months, with livestock prices forecasted roughly flat after coming down from record highs in early 2023 and dairy and cash flow beginning to bottom. In South America, we expect industry sales of tractors and combines to be down about 10%, moderated by strong headwinds during 2023. Brazil, in particular, was challenged with political uncertainty early on in a delayed government ag financing plan announcement. Coupled with already high interest rates and lower commodity prices that reduced farm profitability, the cumulative impact of these headwinds ultimately led to slower retail sales in the second half of 2023. This has been exacerbated most recently by severe dryness in northern Brazil and flooding in the south to start the 2024 planting season. Across the rest of South America, elevated interest rates and heightened economic uncertainty, primarily in Argentina, are further dampening expectations. Industry sales in Asia are also projected to be down moderately, notably with India, the world's largest tractor market by units, down around 5%. Turning to our segment forecast on slide eight, we anticipate production and precision ag net sales to be down between 15 and 20% in fiscal year 2024. The forecast assumes approximately 1.5 points of positive price realization and flat currency translation. Segment operating margin forecast for the full fiscal year is between 23% and 24%, reflecting our ability to sustain gains in structural profitability. Slide 9 gives our forecast for the small ag and turf segment. We expect fiscal year 24 net sales to be down between 10% and 15%. This includes about one point of positive price realization and flat currency translation. The segment's operating margin is projected to be between 15% and 16%. Difting to construction and forestry on slide 10, price realization and higher shipment volumes both contributed to an 11% increase in net sales for the quarter to 3.742 billion. Price realization in the quarter was positive by over six points. This was supported by just over one point of positive currency translation. Operating profit increased to 516 million, resulting in a 13.8% operating margin, Favorable price realization more than offset higher production costs and unfavorable currency exchange during the quarter. Slide 11 provides our 2024 construction and forestry industry outlook. Industry sales for earth-moving equipment in the U.S. and Canada are expected to be down 5 to 10 percent, while compact construction equipment in the U.S. and Canada is expected to be flat to down 5 percent. While end market segments vary, oil and gas continues to be stable. And while housing starts and non-res investments require caution due to the current interest rate environment, U.S. infrastructure and megaproject spending supports continued equipment investment. Global forestry markets are expected to be down around 10% as all global markets continue to be challenged. Global road building markets are forecasted to be roughly flat, reflective of continued strong infrastructure spending in the U.S., offset by softening in Europe. Continuing with our CNF segment outlook on slide 12, 2024 net sales are forecasted to be down around 10%. Our net sales guidance for the year includes about 1.5 points of positive price realization and flat currency translation. The segment's operating margin is projected to be between 17 and 18%, reflecting the continued structural shift in profitability for CNF. And ultimately, Let's transition to our financial service operations on slide 13. Worldwide financial services net income attributable to Deere and Company was 190 million for the fourth quarter. The year-over-year decline was mainly due to unfavorable derivative market valuation adjustments, coupled with less favorable financing spreads and a higher provision for credit losses. These factors were partially offset by income earned on a higher average portfolio. For fiscal year 2024, The net income forecast is $770 million. Results are expected to be higher year over year, primarily due to income earned on a higher average portfolio and a non-repeating one-time accounting correction that occurred in 2023. These will be partially offset by less favorable financing spreads and lower gains on operating lease residual values. Finally, slide 14 outlines our guidance for net income, our effective tax rate, and operating cash flow. For fiscal year 2024, our full-year net income forecast is expected to be between $7.75 and $8.25 billion, demonstrating executional discipline despite increasing pressure from industry headwinds. Next, our guidance incorporates an effective tax rate between 24 and 26 percent. Lastly, cash flow from equipment operations is projected to be in the range of $8 to $8.5 billion. Our ability to generate approximately $8 billion in net income at near mid-cycle sales levels in fiscal year 24 is a testament to the positive structural impacts we've seen from executing our strategy. This now concludes our formal remarks. Let's turn to a few key topics of interest before opening the line for Q&A. I'd like to start with the year in review before we jump to 2024. Not only did we have a record fourth quarter in terms of net income, but we finished the full year with net sales and revenues as well as net income eclipsing the $60 billion and $10 billion mark, respectively. Brent, can you break down what went well both the quarter and the year?